Azenta, Inc. (NASDAQ:AZTA) Q4 2023 Earnings Call Transcript

Azenta, Inc. (NASDAQ:AZTA) Q4 2023 Earnings Call Transcript November 13, 2023

Azenta, Inc. beats earnings expectations. Reported EPS is $0.05654, expectations were $0.02.

Operator: Thank you, and welcome to the Azenta Q4 2023 Financial Results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Monday, November 13, 2023. I will now turn the conference over to Sara Silverman, Head of Investor Relations.

Sara Silverman: Thank you, operator, and good afternoon to everyone on the line today. We would like to welcome you to our earnings conference call for the fourth quarter of fiscal year 2023. Our fourth quarter earnings press release was issued after the close of the market today and is available on our Investor Relations website located at investors.azenta.com in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today. I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements.

I’d refer you to the section of our earnings release titled Safe Harbor Statement, the safe harbor slide on the aforementioned PowerPoint presentation on our website and our various filings with the SEC, including our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. We may refer to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe the non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with the GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Azenta business.

Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves. On the call with me today is our President and Chief Executive Officer, Steve Schwartz; and our Chief Financial Officer, Herman Cueto. We will open the call with remarks from Steve on highlights of the fourth quarter then Herman will provide a more detailed look into our financial results and our outlook for fiscal year 2024. We will then take your questions at the end of the prepared remarks. With that, I would like to turn the call over to our CEO, Steve Schwartz.

Steve Schwartz: Thank you, Sara. Good afternoon everyone, and thank you for joining us. Today, I’ll direct my remarks to a summary of 2023 results and a preview of how we see 2024, including some of our key initiatives. If you’ve seen in our press releases today, we have a lot to talk about on this call, a strong fourth quarter results, a healthy outlook for fiscal 2024, a big order for B Medical Systems, as well as important implications for go forward Azenta, including a significant capital allocation commitment to share repurchases as well as an announcement as part of our regular Board refresh. So let’s get to it. It’s an exciting and energizing time for Azenta. We had a strong finish to fiscal 2023 with fourth quarter results coming in nicely on the top and bottom line.

We’re pleased with the progress we’ve made during the quarter and our positioning headed into fiscal 2024. Fiscal 2023 was another transformative year for the company as we reached over $660 million in revenue. We accelerated and adjusted to the demands and opportunities afforded to an innovative standalone life sciences company. We’ve taken substantial prudent actions to reinvigorate growth in revenue and profitability even in what continues to be a challenging macroeconomic environment. We added key leadership and strategic sales expertise and restructured our commercial team to better focus on specific business lines and increase our coverage of geographies. We continue to build out our portfolio of unique offerings that deliver on our purpose to enable breakthroughs faster.

We extended our strategic leverage and expanded our geographic footprint with the additions of B Medical and Ziath. And as a standalone company after the divestiture of Brooks, we completed the first phase of streamlining cost reductions. There is much more work to be done, but we have a plan for continued execution in the coming year. Notably, we demonstrated positive adjusted free cash flow of $14 million in fiscal 2023, one measure of the progress we’ve made throughout the course of the year and an indication of what this business is truly capable of as we go from here. And on October 1, we moved to our new three-segment reporting structure of multiomics, sample management solutions and B Medical, which we believe will significantly improve our operating efficiency while better aligning our offerings to customer needs and providing greater transparency to our shareholders.

Most importantly, we’re a year better at all that we do and in the value we offer to our customers. Our capabilities continue to enable customers and we’re investing to stay ahead of their needs for solutions that shorten their time to discovery. Altogether we believe we’re extremely well positioned to continue to outgrow the market. And now for some highlights from the quarter. In Q4, we delivered revenue of $172 million, which translates to organic growth of 2% year-over-year and 6% when you exclude our consumables and instruments business which remain soft in line with market trends. Let’s look at the business by segment. In services, we delivered fourth-quarter organic growth of 1% year-over-year. Genomics was down 2% year-over-year primarily driven by continued macroeconomic headwinds.

From a regional perspective, in genomics, China was once again notably strong, delivering 12% organic growth. And although there’s been a significant slowdown in the China economy post-COVID, we’re still growing due to our strong customer relationships and continued share gains with new customers in the region. Despite the softer market environment, we believe our team has adapted extremely well to address customer needs and that performance has been solid on a relative basis. Our sales realignment and strategic investments in sales expertise is proving to be the remedy we sought for our slower omics sales at the start of the year. We have more to do, but as the current organization gains traction we’re in for a return to solid growth in 2024.

In the sample repository solutions business, we grew 9% year-over-year led once again by growth in core storage. As we previously announced, we’re in the process of opening a new bio repository in the Boston area. We’ve received great customer interest and we’re currently in fit-up mode through the end of this calendar year. We look forward to accepting customer samples in early calendar 2024. Since we last spoke with you, we closed another large deal where we’ll provide sample management and multiomics services for a prospective research study. Similar to our project with the Lupus Research Alliance, we’re demonstrating the value of our sample management and sample measurement platform to provide data to researchers doing discovery. This is a multi-million dollar – multi-year partnership rooted in the strong relationship that we developed over many years in the sample repository side of the business.

This win and others like it are a testament to the high-quality capability set and reputation that we’ve built over the past decade. Moving now to products. The products business grew 3% year-over-year on an organic basis, led by record revenues in automated store systems. Store systems grew 38% year-over-year, driven by our large automated stores business which we previously reported has accumulated significant backlog over the past few quarters. This team has done a tremendous job to engineer, deliver and install these orders at customer sites at a record pace. In C&I, we did continue to see year-over-year headwinds but the good news is that this business expanded sequentially for the first time since Q1 of this year. Finally, B Medical ended the year strong delivering $29 million of Q4 revenue led by cold chain solutions.

For the full year, B Medical generated $113 million of revenue and was accretive to our earnings per share. B Medical is a differentiated market leader in the areas that it operates in particular vaccine cold chain and it’s profitable. What’s more? Is it from the lens of Azenta ownership? We see meaningful strategic upside in expanding the scope and reach of cold chain projects. We’re building our reputation as Azenta in fast-growing emerging markets and engaging with several opportunities that will leverage B Medical and the important chain to connect precious biological samples to researchers. One piece of exciting news I’d like to share today is about one of these transformative opportunities. Last week, we signed a memorandum of understanding with the Democratic Republic of Congo for a project to support in-country vaccination efforts.

This project has the potential to generate approximately $60 million in our fiscal year 2024. Let me put this order into perspective on how it impacts our outlook for the year. On top of the $113 million we delivered in ’23, we expect ’24 to be a growth year for B Medical. Our guidance for the year comes from our view of the pipeline, which is richer than it’s ever been. For the upsizing of the DRC deal, the pipeline already included a program from the DRC but not of the magnitude we just described and with it gives us additional confidence in the outlook for B Medical’s business. We have a healthy and growing pipeline but revenue in ’24 will be delivered with a different cadence than we’ve seen in the past or historically, Q1 was the largest quarter of the year.

Keep in mind that B Medical business is agnostic to the macro environment, but it is lumpy. When we guided inside the quarter we’ve anchored on a forecast for which we have orders in hand and our Q1 outlook is no different. We currently expect Q1 to be meaningfully down versus the prior year, but still delivering growth on a full year basis. Herman will provide more color in his prepared remarks. Let me say a little bit more about this DRC project and its strategic significance. It’s important to note that this opportunity began as one that supported traditional vaccine cold chain solutions from B Medical, but because of Azenta, it’s expanded in scope to form the first part of a critical country initiative that will also include the retrieval and processing of biological samples.

Although the secondary part of the project is still being formed, it’s one of the key tenets for why this engagements has come to Azenta and B Medical. We’re enthusiastic about the prospects for this meaningful human health initiative and our enabling role in this important mission. As we wrap up fiscal 2023 and move into 2024, I’d like to revisit our overarching strategy and vision for Azenta. As I think about the progression of the business over the past decade, we started as a life sciences tools and products company, later added sample management services then genomics or multiomics as we now refer to it, and most recently, emerging markets cold chain solutions. We stand here today as a truly unique end-to-end bio sample management company with a platform that provides expertise from sample to answer enabling our customers to accelerate breakthroughs and therapies.

First and foremost, we’re focused on strengthening our key leadership positions in the markets we serve. But we’re also keen to leverage our end-to-end bio-sample management capabilities to drive the next vector of growth. While it’s still early, I’d like to provide some insight into our plans starting with a large deal in the Democratic Republic of Congo, as the first live example. As Azenta, we’re able to source biological samples from participants of certain phenotype, format them for storage and automated workflow analysis, keep them in safe cold repositories and systems until they’re to be interrogated for any of many multiomics measurements. We then supply data on these samples to entities who focus on discoveries and cures. Our ability to manage this entire critical sample sourcing, storage and measurement workflow chain is a unique and increasingly valuable capability for our customers.

Today, most of the samples we handle are from participants of European descent. And although valuable, there’s tremendous interest in biological samples that are from contributors of non-European descent, but these samples are scarce because they’re difficult to obtain, transport and consent. We have the platform that will allow us not only to source these hard-to-collect samples, will also have a means to secure them in regions of interest, allow in-country research on these samples and simultaneously permit access to those rare and valuable samples through our infrastructure. That’s to say, we’ve developed a platform not only to manage and measure samples for others, which has already driven $650 million of business and still has tremendous growth upside, but we intend to use this unique platform to source and provide data on high-value biological samples to a multitude of interested partners.

Hence, the power of our portfolio was clear utilize our cold-chain care and management of samples, exercise our world-class scientific expertise to interrogate these samples and deliver accurate data to discovery teams around the world. The untapped value opportunity of this platform is twofold. First, more customer samples as we tap into a market opportunity that we barely penetrate by bringing order to vast global collections of samples that have accumulated over decades. As we get better at what we do, customers are giving us more to do for them. And second, we can leverage our platform to be the source of high-value samples that are rare, meaning non-European, consented for use in research and discovery, highly annotated through multiomics analysis, and stored even after measurement for use in future research or follow-up analysis.

The clarity of our strategy and where we’ll focus in the near future leads us to a conclusion about the next steps in what’s been a disciplined capital deployment strategy. As of today, we’ve repurchased roughly 25% of our outstanding shares relative to when we started the program last November. Today, we commit to an additional share repurchase of $500 million under the authorization approved by the Board of Directors last year, which will take place in fiscal year 2024. This will still leave us with approximately $500 million in cash on our balance sheet, which we plan to prudently deploy in opportunities that will accelerate growth and enhance profitability over the coming years. Our plans for the remaining cash which should be adequate for the next couple of years will be in support of our strategic roadmap.

This includes organic growth investments to meet the needs of ramping customer demand, cash deployment for structural investments to streamline the operations, like rationalization of footprint and system upgrade implementation, as well as tuck-in acquisitions likely in the tens of millions of dollars range that provide durable recurring revenue and enhance our current portfolio of offerings in support of sample to data. And we believe it’s prudent to have a couple of hundred million dollars available to run the business. To be clear, we do remain active on the M&A front, with an eye toward financially attractive and strategically compelling acquisitions that would enhance the value proposition and accelerate the growth of our unique sample management portfolio.

But as the creator of this unique sample management and measurement capability, we’re also the largest player providing this type of complete service, and companies we target that will add to our capability are necessarily smaller, and though valuable, will not require cash beyond our current needs. While we’re in a challenging macro environment over the short term, we’re confident in our long-term potential. We serve high-growth markets with fundamental underpinnings for healthy expansion. 2024 will be a year of top line growth and increased profitability driven by revenue expansion and significant operational improvements that will drive shareholder value. We’re on a path to be the preeminent provider of high-quality samples and high-value data to the life sciences industry.

Herman will provide more detail during his prepared remarks. But suffice it to say, we expect to grow mid to high-single-digits in a market that’s forecasted to be up low-single-digits or even declining slightly next year. At the same time, we’re laser-focused on profitability enhancement and expect to see improvement from fiscal ’23 to ’24 on both the gross and operating margin lines. I want to reiterate how encouraged I am by our accomplishments in fiscal 2023 and the momentum we have as we head into 2024. We’re incredibly well positioned in the markets we serve and we’re ready to outgrow the market as we convert more customers to our value offerings. I want to thank the entire global Azenta team for their contributions and tireless efforts over the past year.

Before I turn it over to Herman, I want to make a brief comment about the governance changes we also announced today. As the Board continues to add directors to support the company’s ongoing transformation strategy. And to that end, we’re thrilled to announce the nominations of Didier Hirsch and Martin Madaus to join our Board at the 2024 Annual Meeting of Stockholders. Didier and Martin both possess strong life sciences leadership experience and have track records of creating stockholder value. We’re excited to have their fresh perspectives, and I look forward to working closely with them in the new year. At this time, I’m pleased to introduce you to our new CFO, Herman Cueto. Herman joins us from BD, where he most recently served as Senior Vice President of Finance, overseeing segments, regions, FP&A and operations.

Since Herman joined us on the 16th of October, he hit the ground running and has already begun to make great contributions to the team. We’re fortunate to have him on board. And I’ll now turn the call over to Herman.

Herman Cueto: Thank you, Steve. I want to start by saying how thrilled I am to be part of Azenta. Over the past four weeks, I have worked closely with the leadership team, the finance team and other stakeholders to get up to speed on the business. I’ve been impressed by what I have seen and I am energized by the potential that we have as a company. I look forward to meeting our customers and shareholders in the coming weeks and months. With that, I now refer you back to the slide deck available on our website. Turning to Slide 7 for some highlights. Fourth quarter revenue was $172 million, up 25% year-over-year and up 2% on an organic basis. Most notable contributors to growth include a record quarter in our large automated stores business, as well as continued strength in Sample Repository Solutions.

Consumables and Instruments, or C&I, remained a headwind to growth in the quarter. However, on a positive note, we did see sequential improvements as we move from Q3 to Q4. Excluding the C&I business, our organic growth in the quarter was 6%. B Medical also performed well delivering revenue of $29 million, up 10% sequentially. I am delighted to announce that our cost savings initiatives are on track, and the benefits were felt in the quarter, where we delivered non-GAAP EPS of $0.13 and adjusted EBITDA of 4.6%, reflecting continued momentum. In the quarter, we also benefited by approximately $0.05 or $5 million pretax from the reversal of a stock-based compensation accrual versus our Q4 guidance. This accrual favorably impacted net income and had no impact to adjusted EBITDA.

Moving to the full year. Fiscal year 2023 all-in revenue of $665 million represented 20% growth, while organic growth declined 1% in the full year. When you exclude C&I, our organic growth was 5%, a strong performance relative to the market. For the full year, acquisitions contributed $127 million to revenue, including $113 million from B Medical. Fiscal 2023 non-GAAP EPS was $0.31, and adjusted EBITDA margin finished at 4.6%. As we move from the first half of 2023 to the second half of 2023, we saw an acceleration in adjusted EBITDA margin of more than 300 basis points, largely driven by our cost savings initiatives. Turning to the balance sheet and capital deployment. We ended the year in a very strong position with $1.1 billion in cash, cash equivalents and marketable securities and no debt outstanding.

Free cash flow was positive for the second quarter in a row at $30 million as we continue to focus on commercial execution and working capital management. For the full year, when you exclude certain payments in the first half of 2023 related to the divestiture, we delivered positive adjusted free cash flow of $14 million. In addition to the positive finish to fiscal year ’23, I want to highlight to everyone that we have returned over $900 million to shareholders via our repurchase program as of today. This repurchase program has reduced the share count by over 19 million shares, or by approximately 25% over the past year. Today, as Steve mentioned, we announced a commitment to repurchase an additional $500 million worth of shares in fiscal 2024, which will complete the $1.5 billion share repurchase authorization announced last year.

We are extremely well positioned from a balance sheet perspective. And after this investment, we will still have roughly $500 million of cash on hand to be used for disciplined and long-term value-creating initiatives. Now let’s turn to Slide 8 to take a deeper look at our results in the quarter. As previously mentioned, total revenue was $172 million, up 25% year-over-year. Non-GAAP gross margin was 42.8%, down 110 basis points. We did see positive gross margin expansion in the services and legacy Azenta product segments. The year-over-year favorability was largely driven by cost savings initiatives within operations and favorable product mix, namely in large automated stores. This favorability was offset by a soft B Medical margin. I’m happy to report that in Q4, our cost savings initiatives within our operating expenses accelerated sequentially, and the benefits we expected to see in the P&L were realized.

Non-GAAP operating margin was negative 0.5%, down 200 basis points year-over-year, primarily driven by the dynamics I just described. Again, non-GAAP earnings was $0.13 per share in the quarter. Now let’s turn to Slide 9 for a review of our Life Sciences Products revenue and gross margin. Total segment revenue was $82 million for the quarter, up 70% year-over-year, driven primarily by acquisitions which contributed $30 million. For the first time all year, the product segment returned to growth on an organic basis, up 3%. The performance was led by strong double-digit growth in large automated stores, partially offset by lower C&I sales. Excluding the C&I business, products was up 21% organically. Products fourth quarter gross margin was 37.9% and down 230 basis points year-over-year.

Next, please turn to Slide 10 for a review of our Life Sciences Services segment, revenue and gross margin. The services segment delivered $90 million of revenue in the fourth quarter, an increase of 1% year-over-year. The organic revenue for the quarter was also up 1%, led by strength in Sample Repository Solutions, partially offset by softness in Genomics. In Genomics, organic revenue declined 2% as we saw continued double-digit year-over-year growth in China, offset by softer revenue in the U.S. As the genomics market overall continues to face pressures from macroeconomic uncertainty, pricing and a difficult funding environment. In SRS, revenue growth was strong, up 9% on an organic basis, driven by the core storage business. The Services business delivered 47.2% gross margin, up 140 basis points year-over-year, with improvements in both Genomics and SRS businesses.

Now let’s review the balance sheet in a little more detail on Slide 11. Key areas to highlight are inventory and accounts receivable, where the improvement was primarily driven by the underlying performance of the business and our operations teams, who have put in significant effort and are making good progress to reduce inventory balances as well as accounts receivable, both of which had become elevated during the COVID period. Let’s turn to Slide 12 to address the current period cash performance. Cash flow from operations was $40 million, primarily driven by the improvement in working capital. Capital expenditures for the quarter were $10 million. Let’s turn to Slide 13, where I want to remind everyone that starting in fiscal year ’24, we will move to a three-segment structure, which consists of Sample Management Solutions, Multiomics and B Medical.

Sample Management Solutions combines our Sample Repository Solutions business as well as the product segment, excluding B Medical. Multiomics is the renamed Genomics business. B Medical will be reported in its own segment, given its distinct end market dynamics and revenue cadence. We have provided much of the necessary information to model the new segments in the past disclosures as well as in the appendix of today’s presentation. Now let’s turn to Slide 14 for fiscal 2024 guidance. For the full year, we expect to deliver organic revenue growth in the range of 5% to 8% year-over-year or $696 million to $718 million. FX is currently expected to be a nominal headwind. By segment, we expect multiomics to grow low to mid-single digits, sample management solutions to grow mid to high single-digits and B Medical to grow mid-single digits.

Growth will be driven by a combination of sales execution as the investments we made in our sales force begin to reach optimal productivity, broadening the use of channel partners in certain regions, expanding our geographic footprint as well as by innovation and new product introductions as we develop new vectors of growth. As you look to model the OpEx line, please note you will see the expense come up as we reset our variable compensation levels to par as we enter the new fiscal year. We will also have some added expense related to the Boston repository investment. We will, however, see offsetting benefits from the annualization of our cost initiatives completed in fiscal ’23, along with the cost initiatives already identified that will start in the second fiscal quarter of 2024 and increase as we move throughout the year.

While we are on the subject of operating expenses, I want to take a moment to recognize the numerous actions we have taken to improve our cost structure, which you could see in the EBITDA margin expansion from the first half to the second half of fiscal ’23. And although we have taken actions to enhance our efficiency, we still have meaningful opportunity to optimize our expense structure. We look forward to sharing more on this in the future. As you could see on Slide 15, on the adjusted EBITDA line, we expect EBITDA dollars to grow nearly 75% year-on-year. This translates to approximately 300 basis points of margin expansion versus fiscal 2023. This expansion reflects the impact of our cost initiatives as well as solid leverage on sales growth.

The work we will do to further rightsize our cost structure will positively impact both EBITDA dollars and margin. We expect EPS to be in a range of $0.19 to $0.29 per share. Our commitment to return capital back to shareholders through the completion of the initial $1 billion of share repurchases and as well as today’s announcement for an incremental $500 million of share repurchases for fiscal 2024 is expected to reduce our average share count to approximately 52 million shares in fiscal 2024. However, our share buyback will also reduce interest income in fiscal 2024 to $27 million to $29 million. The lower share count, offset by the lower interest income, creates a short-term net headwind of approximately $0.13 in fiscal year ’24. In addition, we estimate the tax rate will increase to a range of 33% to 37%, which is an approximately $0.03 headwind year-over-year, largely driven by deferred tax assets that will not be realized related to stock-based compensation.

If we remove the net impact of stock-based compensation, our effective tax rate would be comparable to 2023. And finally, with regard to cash flow, we expect capital expenditures of roughly $50 million in fiscal 2024 and we are highly focused on free cash flow generation and expect to be cash flow positive in the year. In terms of the quarterly guidance, please refer to Page 16 of the slide deck for color and key considerations. We will provide this color every quarter and update our full year guidance based on what we are seeing. Excluding B Medical, the business is expected to grow low-single digits in the first quarter. Our current forecast for B Medical anticipates a decline of approximately 75% year-over-year due to the timing of orders.

In total, we expect Q1 revenue will decline mid-teens year-over-year. Notwithstanding Q1 softness in B Medical, it is important to anchor back to the full year where we feel very good about the 5% to 8% growth for Azenta. B Medical’s expected mid-single-digit growth in fiscal 2024 is underscored by the opportunity in the Democratic Republic of Congo, which we just announced, and by itself could represent 50% or more of their full year revenue. We expect gross margin to be down in Q1, driven primarily by B Medical. R&D expense as a percentage of revenue is expected to be around 6%, and SG&A as a percentage of revenue is expected to be at its highest point of the year and approaches the mid-40s. Keep in mind that Q1 reflects the full impact of the strategic sales investments, while our additional cost savings initiatives ramp throughout the year starting in Q2.

Overall, we expect the business to be roughly breakeven on adjusted EBITDA and approximately a few pennies negative on non-GAAP EPS for the quarter. In closing, we are pleased with our performance in fiscal 2023 and are especially optimistic about the progress we made in the business as we move through the second half of the year. Still, we know there is much work to be done. Our attention moving into fiscal year 2024 is on continued strong execution with an acute focus on accelerating our margin expansion initiatives, which we will be talking to you more about in the upcoming quarters. I also look forward to an Analyst Day early next year where we can lay out a framework for our longer-term strategy and financial goals. We are committed to delivering on our purpose, serving our customers and enabling life sciences breakthroughs faster.

This concludes our prepared remarks. And I now turn the call over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of David Saxon with Needham. Your line is open.

David Saxon: Great. Hi, Steve. Hi, Herman. Thanks for taking my questions and congrats on the quarter. Maybe I’ll start with a multipart question on multiomics or genomics – legacy genomics. So you called out weakness on pricing. It would be great if you could break down, the price versus volume contribution for growth in the quarter. Is any modality more impacted by pricing than the others? And then in terms of guidance, obviously calls for some acceleration for multiomics. So maybe can you talk about the puts and takes for reaching the low-single-digit growth floor versus getting to the mid-single-digit growth ceiling that’s embedded in guidance? And then I have one follow-up. Thanks.

Steve Schwartz: Okay, great. Hi David, this is Steve. Herman and I will share the response. Just a couple of things. There is some pricing impact. I can’t tell you exactly what it is, but we saw the similar growth across each of the elements across NGS, across Sanger and across Synthesis. So it seems to be a softness in the market as opposed to specifically pricing. But we sustained the revenue with just a really slight decrease, but we’re battling for everything. There’s no question about it. But I think the volume of customer activity in each of the areas is depressed and we’re seeing that uniformly across. So it’s not a single area of the omics business, but rather uniformly across. And without question, we’re down in some of the small bio-techs.

I think everybody is feeling that, and we’re certainly no exception. But there’s pricing – there’s a pricing differential of a few percentage points for the compare year-over-year, for example, in NGS. And we’re making up for a lot of that in volume and we’re continuing to maintain good margins in that business.

Herman Cueto: And David, maybe – it’s Herman. Maybe I’ll just add a couple of things. The pressure was probably worth about 50 basis points to margin in the quarter. But where I would like to anchor you on is when we talk about the guidance of low single digits, I think there’s a couple things to think about. We do expect pricing pressure to continue into fiscal year ’24 and we’ve cared for that in the guidance that we’ve given, but when you think about the sales force investments and the direct alignment, we feel good about the coverage that we now have, and those investments should start to pay off as the reps begin to hit their optimal productivity levels. We are expanding channel sales in places like Europe and Japan. And there’s a really good innovation story here when we talk about things like AAV packaging and Sanger easy. And that’s what gives us a lot of confidence that we have in the low single digits that we described in the guidance.

David Saxon: Great. That’s super helpful. Thanks for that. And then just on my follow-up on the B Medical agreement with the DRC, so $60 million comes out of that B Medical, obviously you’re calling to be down 75% in the first quarter. So does that project start to kick in, in the fiscal second quarter or is it later? And then this $60 million, that comes from that, is that all assumed in guidance or does that extend into fiscal ’25? Thanks so much for taking my questions.

Herman Cueto: Yes. So, David, I – what I would say is we don’t want to sit here today and predict the timing of when this is going to come in. It wouldn’t be prudent for us to do that. We do think that we should have the ability to – as soon as the order comes in, fill whatever portion of it is requested. We do expect a lot of it to come in fiscal year ’24, as we described. We have the inventory ready to go. So as soon as the order comes in, we will ship it. But right now to predict the timing on that, we – it wouldn’t be wise for us to do that. There’s a lot of moving parts to it. What I would say is this that think of it in terms of – it’s a pipeline. And we did have DRC in the pipeline, but it certainly wasn’t at the magnitude that we’re describing now.

So it does bolster the pipeline quite a bit. So the way I would think about it is, is this order gives us a ton of confidence in the full year and probably gives us the ability to potentially do better than what we’re currently describing.

David Saxon: Great. Thanks so much, Herman.

Operator: Your next question comes from the line of Jacob Johnson with Stephens. Your line is open.

Jacob Johnson: Hi, good evening. Congrats on a nice quarter and thanks for taking the questions. Maybe just sticking on the B Medical topic. I think revenues were up sequentially, but gross margins were down sequentially. Can you just help us understand kind of what drove that? Was it mix? Was it something else? And then on the DRC contract, is there any way to think about any impact that could have on B Medical margins?

Herman Cueto: Yes. So just in the quarter, you’re right, there was a soft B Medical gross margin. In the quarter, we took a precautionary warranty reserve for a component in our vaccine cold-chain products. We have some work we need to do with the supplier to resolve a spec issue. It was a couple of million dollars. And what I would ask is, keep in mind, these products have a long warranty of up to 10 years. So we took it as a precautionary measure.

Jacob Johnson: Got it. Thanks, Herman, and welcome by the way. And then —

Herman Cueto: Thank you.

Jacob Johnson: Maybe for Steve, just on the large stores that was a standout again this quarter. You cited that backlog. Can you just kind of update us on where that backlog stands? And then kind of any commentary around like new order trends, I guess large capital equipment has been an area that some have called out some softness in this quarter. So I’m just curious if you’ve seen any change there.